Posted by Nate on March 13, 2001 at 22:48:32:
Well thought out and informative. Thanks!
NT
4-plex questions - Posted by marcello
Posted by marcello on March 13, 2001 at 14:54:02:
Hi,
I am now in the market to purchase a 4-plex (or bigger if possible). I have looked at several and my objective is to put down enough money to balance out my rent.
Basically, I am willing to do all the managing duties if I can find a building that I can work out those numbers to cover rent.
My problem is that I am very new to real estate and I am worried about getting myself into a situation that appears as though I could meet my goals but actually cost me a lot more every month. I am aware that I can get a very low down deal because I am going to live there but that would cause me to have to pay rent. And seeing that I have money to put down, that does not make sense.
I am in Southern Califonia where the vacancy rates are very low but prices and rents are high. I have the money to put down (and good credit), and I would like to put down as little as possible to meet my objectives.
As I am trying to work out the numbers, I am hoping that someone could help me in analyzing these properties. IE, making sure I am not missing some important factors that will run my costs way up.
Also, because I will qualify for most lenders, who is the best one to go to. Should I just be looking at interest rates, or long term loans, etc?
Thanks in advance for your help.
Marcello
Re: 4-plex questions - Posted by Earnest
Posted by Earnest on March 13, 2001 at 18:50:45:
Your words sound like your stepping into unchartered territory and are understandably wary. If this is true, then congratulations on being willing to dream of a new direction and experience in your life. It’s right to think critically, of course, and right to seek as much information as possible before you blunder forth.
I’m new too, and I ?m not gonna tackle some of your questions; others can do that. But I did this a year ago and can recommend small, multi units to you. I believe most veterans wold warn against buying larger than a 4-plex if you are not experienced.
If you are currently renting, then you can hardly miss. My experience is buying a 3-plex, making a ton of mistakes. I paid at least 35K too much, and I didn’t check out all the legal and maintenance stuff, resulting in higher maintenance costs than I had figured and some problems and I want’ able to convert some space in into a fourth unit for zoning reasons. Less income for me as a result. Even so, I went from burning $565/mo in rent money too about, after taxes, 290/mo out of my pocket for PITI + maintenance. .
I did this while making mistakes. If you’re renting now, stand a really good chance of coming out ahead, too. You will come out ahead to. And you will “blunder forth.” Think about it, no one can trek new territory without making mistakes. Assume that you will make misdates and plan for it.
Are you going to live in one unit? You may be able to get an FHA loan at 3% down. There are other options. Keep studying. The less you put down, the higher the amount you will be borrowing and the higher the monthly installments. If your getting a standard mortgage, be aware that there are a lot of add-ons and other costs that lenders have come up with, and you will have to pay them if you get any sort of traditional loan. Expect installments to be about 30% (that may be high, but its best to be safe) above what your financial calculator says is the principle + interest will be. Check out the property taxes and be aware that once a property is purchased fro a new, higher purchase price that the previous sale, property taxes may go up. Also find out what hazard insurance is. Maybe the owner will show you his policy; while your at it find out about utility costs. Because of the way community bills are structured some costs like water and garbage removal may be, and have to remain, at the owner’s expense. You’ll want to know about these costs. . .
Some other points I’ve learned.
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Don’t fall in love with the place before you close. I read this message several places. I told myself I wouldn’t, but I did anyway. The longer negotiations went on (especially with lenders) the more I let my big head get in my way. All of a sudden it became a matter of ego that I make the sale. Ugh! As a result I let others tell me what I HAD to do. Don’t let this happen to you. You don’t have to do anything. You don’t have to buy if terms are not to your advantage. The buyer can be in the drivers seat. The owner wants to sell, and the longer you talk, the more he or she is likely to taste a sale and be guided by this impulse. There’s a host of things that may drive the seller. RE agents don’t make money unless there is a sale. Even lenders don’t make money unless they can make loans. So, as a potential buyer, even after signing and paid good faith money, you still have many outs. Make a lost of things you need and don’t proceed until each one is checked off. The owner, agents, and lenders have to do a lot of things before you have to sign on the dotted line. Use this to your advantage.
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Don’t fall in love with the place before you close
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Don’t fall in love with the place before you close
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Don’t fall in love with the place before you close. Are you getting my point?
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Don’t assume anything. Don’t assume that just because a 4-plex has sat there for several years, it meets local zoning. Go down to the zoning office and find out. This is especially true of one or more units were added after the initial construction. Someone may have added a unit without talking to the zoning board. While you’re there ask about other ordinances, such as parking and utilities. In my area landlords are required to provide off-street parking for tenants. What about water run off? Did a previous owner fashion himself as a do-it-yourself-handyman, but he wasn’t? These are things you will need to find out. The more you check out, the more information you have, the better your bargaining position, and the less likely you are to make mistakes.
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Tenants. Are the units currently rented? Who’s in them? How did the present landlord go about renting to them? Are there 1 yr leases, month-to-month agreements? Is it in writing? Lenders will probably require 1 yr leases, and the present owner will have to see to this. This can be to your advantage, but there are pitfalls. Your money may be tight post sale, and having some assurance about steady rent payments for a time would be helpful. One the other hand, the current owner won’t care about whose in the units and would be happy to write new one year leases with current tenants. Bad tenants would be happy to have a one year lease, remember. They have a tough time finding any place and would gladly sign a contract that makes it very difficult to be evicted. Are there friends and relatives of the current owner living there. IF so, they are probably going to want to leave as soon as possible. You would have to plan for this
Also, if you are going to move into one of the units, is it possible. Is there a unit available?. It would have to be if you use a government-backed loan. What do current leases say and what is the law in your area? Do current contracts they say they are subservient to a sale? -
Be wary of the owner secretly finding other tenants before a close. This happened to me, and I understand it happens frequently. This could happen if a tenant moves out (many do, they get nervous about new owners, etc.) And Th owner finds new tenants just so you and the lender are happy. The problem is, that the owner has to find tenants in a hurry and will gladly except any warm body to rent. You’ll pay for this down the road. (Bad tenants cost a lot. They pay late if at all, they ruin apartment carpeting, etc. They don’t want to leave because they have a hard time finding anywhere to go.) If you make an offer, include in your offer that the owner must notify you of any change in tenants, that you have right to review the acceptance process, see credit reports, etc., and that if he or she fails to do this, you can back out of the sale.
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Prepare now to be a landlord. Study. Find copies of contracts, and discuss them with a layer. Make sure that what you will stand up legally. Laws vary from area to area, so don’t just grab anything off the internet or out of a book; it may not sufficiently address the laws of your area. Also, don’t just accept that what other landlords in your area are using. Just because other people use them, doesn’t mean they’re good. I found a lawyer that had just been through the eviction process in my area on the side of the landlord. I recommend this approach to you.
There are many things you will need to do as a new landlord right away. Things that should not wait. I studied "Landlording: by Leigh Robinson and recommend it to anyone who is interested in it.
Lastly, I find ownership and landlording fun. Will you? Don’t do it if you won’t. If you’re not sure, you will find this out now. If you enjoy learning about real estate and landlording, are sorta gung-ho about it, then, chances are you want to do this. If not, well . . . . Why would anyone want to do this if they don’t enjoy it? I doubt anyone can be successful unless there is a certain amount of satisfaction just in the day to day ins and outs of real-estate.
I have plans for what I might do over the next few years which may or may not pan out, but its fun researching and planning. I enjoyed studying and developing rental agreements. I enjoyed finding new tenants. Will you? If not, it would be a problem. Make sure this is something you want to do. Some like it, some don’t I live in my place, so my tenants know me. You will find many people say that you don’t want your tenants knowing you. This hasn’t been a problem with me. In the past year, I’ve replaced the tenants in both of my units. I was happy to get rid of the previous renters. Now, I have professional people, people with advanced college degrees. No noise. No mess. No arguing. These days, there is a lot of recently divorced people with their finances in good repair, or people starting a new life. In one unit I have a middle-aged woman who left her family to pursue a lesbian relationship, not ready to buy a place now. She’s master degree’d, and a very competent person. First thing she did was paint and make some minor repairs to a kitchen. It looks much nicer, and it cost me nothing. She always pays her rent on time. Because she’s a good renter, I want to keep her; I fix things immediately. I wrote into my lease agreements that essential repairs would be at my experience but that nonessential repairs require the tenants to pay a portion if they want the repairs made. So far this is working ok. There’s still an expense for me, but I’m repairing MY property. My other unit has a recently divorced CPA with a six-figure salary. There’s no problem with his finances despite the divorce, his ex makes more than he does. He may not stay a long time, but I will have him for a t least one year.
Just for your info. Good luck to you.